Property used in confinement hog operation not exempt from Iowa sales or consumer use tax

September 13, 2006 | Roger McEowen

Iowa law (Iowa Code §§422.45(26) and (39)) exempts from sales tax the gross receipts from the sale or rental of farm machinery and equipment if the items are used directly and primarily in livestock or dairy production. That raises a question as to whether certain items associated with a confinement hog facility are eligible for the exemption. That was the question raised in this case.

The plaintiffs are a company that constructs confinement hog buildings and a tenant of the buildings owned by Austin Decoster. The Iowa Department of Revenue (IDOR) audited the plaintiffs and assessed substantial penalties and interest against each of them for failure to pay state sales tax on items associated with confinement hog buildings - the total deficiency exceeded $2 million. The plaintiffs agreed to consolidate the cases and appealed to an administrative law judge (ALJ), who issued a proposed decision for the plaintiffs. The IDOR appealed to the Director of Revenue, who reversed part of the ALJ’s ruling.  From that decision, the plaintiffs appealed to the Iowa State Board of Tax Review (Board). The Board concluded that nursery flooring, concrete slats, exhaust fans, curtains, curtain controllers, curtain machines, washers, dryers, refrigerators and mowers were not within the exemption for agricultural machinery and equipment, and were subject to sales tax. The Polk County district court affirmed, and the plaintiffs appealed.

On appeal, the Iowa Supreme Court noted that while matters of statutory interpretation are for the courts to determine, the IDOR’s interpretation of law, factual determinations and application of law to the facts at issue are entitled to substantial deference. That means that the IDOR’s ruling will be upheld unless it is not supported by substantial evidence and is otherwise unreasonable. As for the concrete slats, nursery flooring, exhaust fans and curtains, the Court determined that the IDOR’s finding that the items had become an integral part of the structure of the building and could not properly be classified as “equipment” or “machinery” was a reasonable conclusion supported by sufficient facts. As for washers, dryers, refrigerators and mowers, the Court upheld the IDOR’s finding that such items were not directly used in livestock production as required by the statute, but were at least one step removed from agricultural production. 

The Court’s opinion raises an interesting policy question as to whether the statutory exemption from sales tax for ag machinery and equipment should be amended to reflect the changing nature of agricultural production. The real question is whether the purchase of items associated with mechanized, industrialized agricultural production is to be granted tax-favored status in Iowa.  At least for now, the Court has ruled that the answer to that question is “No.”  Iowa Ag Construction Co., Inc., et al. v. Iowa State Board of Tax Review, 723 N.W.2d 167 (Iowa Sup. Ct. 2006).